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Why you should ignore the recent FOMC minutes

James Malthus, Macro Analyst

Fed minutes imply December taper, but the meeting was back in September

The Federal Open Market Committee (FOMC) is the group at the Federal Reserve that determines monetary policy in the US. The minutes to its meetings are released one month after decisions are made. Last month, the committee decided not to taper asset purchases, so this month investors get to read the internal debates that led to that decision.

The language used in the report implies a near-term taper, with a majority of members expecting to begin tapering by the end of the year and finish tapering by the middle of 2014. Also, the decision not to taper was evidently a “relatively close call.”

(Read more: China’s wage inflation: Bad news for corporate profits and banks)

Fiscal and monetary policy are blending together

All of this debate took place before the recent shutdown and debt ceiling fiascos, so investors should discount what was said in September and expect the Fed to account for any potential economic damage done by these fiscal problems. The Fed’s easing this year has been partially motivated by the budget sequester, and the Fed should be expected to try to offset fiscal shocks in the future. Also, if the shutdown resolves with a compromise that includes fiscal tightening, the Fed would probably offset that as well.

The taper could be pushed out to 2014

If the taper is delayed until early 2014, it would be bullish for US equity ETFs such as the SPDR S&P 500 (SPY), iShares Russell 2000 Index (IWM), SPDR Dow Jones Industrial Average (DIA), iShares S&P 500 Index (IVV), and SPDR S&P MidCap 400 (MDY). Emerging market ETFs would likely be positively impacted as well. Politics and monetary policy have been the sole drivers of equity markets for the past four years, and investors shouldn’t expect that to change any time soon.

(Read more: Analysis: Why China’s export growth rates are slowing)

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